Landlord tax guide

Your guide to landlord tax

As we approach a new financial year, Angharad Trueman our Lettings Director has put together our easy to read guide on landlords’ tax obligations.

As a landlord, you're navigating a complex tax landscape, impacting every stage of your investment—from purchase to letting and eventual sale. Understanding these obligations is crucial for maximising returns and avoiding penalties. This guide provides a comprehensive overview of UK landlord taxes, offering insights into liabilities and strategies for tax efficiency. Remember, this is general information, and consulting a qualified tax professional is essential for personalised advice tailored to your unique circumstances.

Key Taxes Landlords Pay:

1. Stamp Duty Land Tax (SDLT):

- When: Payable upon purchasing a buy-to-let property.
- Details: In England and Northern Ireland, a 3% surcharge typically applies to buy-to-let properties, on top of standard SDLT rates. Scotland uses Land and Buildings Transaction Tax (LBTT), and Wales uses Land Transaction Tax (LTT), each with its own rate bands.
- Exemptions: First-time buyers may have exemptions on their primary residence, but these rarely apply to buy-to-let.

2. Income Tax:

- When: Payable on rental income.
- Details: Rental income is added to your total income and taxed according to your income tax band (basic, higher, or additional rate).
- Allowable Deductions:
  - Mortgage Interest: Since April 2020, landlords receive a 20% tax credit on mortgage interest payments, rather than deducting the full interest as an expense.
  - Letting Agent Fees
  - Maintenance and repairs (not improvements).
  - Insurance premiums.
  - Council tax and utility bills (if paid by the landlord).
  - Ground rent.
- Example: If your rental income is £10,000, and your allowable expenses (after the mortgage interest tax credit changes) are £3,000, your taxable rental profit is £7,000. This is added to your other income and taxed accordingly.

3. Capital Gains Tax (CGT):

- When: Payable upon selling or disposing of the property for a profit.
- Details: CGT is calculated on the profit (gain) made, after deducting allowable costs.
- Rates:
  - Basic-rate taxpayers: 18% on residential property gains.
  - Higher/additional-rate taxpayers: 28% on residential property gains.
- Exemptions:
  - Annual CGT allowance (currently £6,000 in 2023/24).
  - Private Residence Relief (PRR) may apply if the property was previously your main residence.
  - Reporting: CGT must be reported and paid within 60 days of property completion.
- Example: If you bought a property for £200,000 and sold it for £300,000, your gain is £100,000. After subtracting the annual allowance, you pay CGT on the remainder.

4. Council Tax:

- When: Payable during void periods.
- Details: Landlords are responsible for council tax when the property is vacant.

5. Value Added Tax (VAT):

- When: Generally, not applicable to residential lettings.
- Details: VAT may apply to furnished holiday lettings (FHLs) or if you're a VAT-registered business providing property management services. FHLs have specific tax rules, allowing for certain capital allowances and business reliefs. The property's value is included in your estate for IHT calculations.

6. Inheritance Tax (IHT):

- When: Payable upon passing the property as part of your estate.
- Details: The property's value is included in your estate for IHT calculations.
- Rates: Typically, 40% on amounts above the nil-rate band (£325,000)
- Reliefs: Residence Nil-Rate Band (RNRB) may apply.

Tax Efficiency Strategies:

Maximise Allowable Expenses: Keep detailed records of all eligible expenses.
Ownership Structure:
- Limited Company: Consider a limited company for potential tax efficiencies, such as retaining profits and managing tax liabilities. However, be aware of potential double taxation when extracting profits.
- Joint Ownership: Sharing ownership can split income and CGT liabilities.
Tax-Free Allowances: Utilise the £1,000 property allowance for low earners.
Capital Gains Planning: Time sales to maximise annual CGT allowances and consider PRR where applicable.
Private Residence Relief: You do not pay Capital Gains Tax when you sell (or 'dispose of') your home if all of the following apply: you have one home and you've lived in it as your main home for all the time you've owned it, you have not let part of it out - this does not include having a lodger.
Furnished Holiday Lettings (FHL): If your property qualifies as an FHL, ensure that you take advantage of all of the tax benefits available.

Submitting Your Self-Assessment Return:

A Self-Assessment return for a particular year can be submitted from the day after that tax year ends. For example: The end of the 2023/2024 tax year is 5th April 2024. You can submit your Self-Assessment tax return for the 23/24 tax year from 6th April 2024 onwards.

Reporting and Deadlines:

Self-Assessment tax returns: File by 31st January (online) or 31st October (paper).
CGT Reporting: Report and pay within 60 days of property completion.
Record Keeping: Maintain records for at least six years.
Making Tax Digital (MTD): Be prepared for the increasing digitalisation of tax reporting, which may require digital record-keeping and quarterly submissions.

What happens if you miss the deadline:

Late filing penalty: Landlords who are required to file a return but miss the deadline will receive an automatic £100 penalty from HMRC - whether or not they owe tax. File by 31st January (online) or 31st October (paper).
Additional fines will be added on top of the £100 penalty dependent on how late you file.

Regional Tax Differences:

Remember that Stamp Duty, and its equivalent taxes are different in Scotland and Wales.
Always research the specific rules for the region your property is located in.

Professional Advice:

Seek advice from a qualified tax advisor specialising in buy-to-let taxation. They can provide personalised guidance and ensure compliance.

Navigating the tax landscape as a landlord can be daunting, but paying tax on rental income or gains doesn't have to be inefficient. Small changes could lead to big savings!

Our specialist lettings team is here to help you optimise your tax position. Andrews Lettings can guide you through the complexities of landlord tax, ensuring your investment is protected and your returns are maximized.